Peter L. Bossaerts
Peter L. Bossaerts's Research
My research activities have shifted from traditional asset pricing and financial econometrics to various aspects of experimental finance. This includes, but is not limited to: (i) the study of general equilibrium theory of asset pricing using large-scale, web-based experimental financial markets, with focus on the impact of cognitive biases on prices and allocations; (ii) the study of market dynamics (equilibration and stability); (iii) the development of econometric tools to analyze data from experimental financial markets; (iv) the development of flexible software to deploy platform-independent web-based financial markets; and, most recently, (v) the exploration of the neuro-scientific foundations of perception of financial risks.
The purpose of experimental finance is to provide a solid scientific foundation for finance, from the individual (through behavioral and neuro-scientific observation) to market-level phenomena (prices and allocations). While attention is paid to ecological relevance (are the risks of a type that most subjects would be familiar with?), the experimental settings reflect the level of abstraction that is needed to fruitfully study theory. For instance, many of the frictions such as taxes and transaction costs that are commonly found in the field are absent in my markets – just like they are absent in the most fundamental versions of the theory.
This approach has led to important successes. My collaborators and I were the first to ever verify the basics of asset pricing theory, while at the same time uncovering a startling puzzle: while prices quickly converge to the right configuration, allocations do not. Follow-up experiments demonstrated that while the theory explained only a tiny fraction of people’s choices, it explained the very fraction that correlated across people, and hence, the one determining pricing. Intrigued by the enormous behavioral heterogeneity in our experiments, we started a promising research program to understand the impact onto prices and allocations of cognitive biases as they naturally occur among large groups of people.
With our experiments, we can answer questions that cannot possibly be answered with field data, such as: Do markets equilibrate? How do they equilibrate? Field studies interpret the data through the lens of equilibrium theory and cannot independently verify the appropriateness of this lens for lack of information. Unlike in physics, (market) equilibrium cannot be defended on more fundamental principles, and as such remains a concept that is to be verified empirically. In this context, we were able to observe some striking regularities in equilibration, which led to a formulation of a new theory of market dynamics and the design of follow-up experiments.
Last updated: March 20, 2009 13:58
